Businessweek Archives

Poland: The Pain And The Gain

April 14, 1991

Special Report

POLAND: THE PAIN AND THE GAIN

On Nowy Swiat Street in Warsaw, elegant new boutiques selling Christian Dior perfume and Italian shoes are jam-packed with customers. Shoppers stop and ogle the Mercedes and Porsches at glistening showrooms. And private restaurants abound, from a pink neon pizza parlor to an Arabian caravansary with doormen in flowing red robes. Even the drab, Stalin-era Palace of Culture is bustling with shops offering everything from tennis rackets to refrigerators. It's an incredible change for the Eastern European economy once labeled one of the least likely to succeed.

In just 18 months, two Solidarity-led governments have largely swept away the strictures of Poland's backward, demoralized command economy, clearing the way for a rapidly growing private sector. Overnight, shock-therapy reforms have crushed hyperinflation, allowed Poles to convert zlotys to dollars, freed prices, and relaxed import controls. In the past year, more than 500,000 new companies-from giant supermarkets to software houses-sprang to life.

AUSTERITY. The Polish economy is also showing early signs that it can fend for itself in world markets. Exports to the West, including glass and electrical components, jumped 34%, to more than $11 billion, and the country's hard-currency trade surplus soared to $4.7 billion. "We finally have money in this country again," says Tadeusz Polok, president of the newly privatized Silesian Cableworks.

The Poles' self-imposed austerity program has won them a big boost from the West. Last month, in an unprecedented move, the Paris Club forgave 50% of Poland's $33 billion debt to its members. Says Ian Hume, a Warsaw-based World Bank official: "Poland saw an extraordinary transformation in 1990."

But they paid a price: Industrial production fell 23% in 1990. Battered by a sharp drop in Soviet trade and a spike in oil prices, many heavy-industry giants survived the year by shedding workers and letting debts go unpaid. This year, tight money designed to keep inflation down will likely result in a wave of bankruptcies, and unemployment could jump to 2.7 million, or 17% of the work force. So far, workers have taken the hit without rebelling. "Poles know if they go on strike, they are now striking against themselves," says East Europe expert Holger Schmieding of the Institute for the World Economy in Kiel, Germany. But their patience is stretched. "This is the crucial hour for us," says Henryka Bochniarz, a government adviser and president of Nicom Consulting Ltd. in Warsaw. Keeping the social temperature down and the economy on course depends largely on President Lech Walesa, the former Solidarity leader. This year will test his vast popularity and his ability to defuse resentment. "There must be a scapegoat," says Walesa, "and now it is me."

Walesa's government has begun to channel worker discontent into German-style labor negotiations. Says Labor Minister Michal Boni, a former Solidarity activist: "We need to introduce a culture of conflict resolution." At the same time, officials are scrambling to speed privatization and rebuild financial institutions. The sell-off of state companies stalled last year, as officials agonized over accurate pricing. Now they are pursuing simpler methods to sell 1,000 of a total of 7,600 state enterprises by yearend. Five hundred medium-size companies, from meat processors to textile mills, are to be sold to workers and managers. And Westerners can now bid directly for state companies.

UNDER PRESSURE. But selling off dinosaurs such as the Nowa Huta steel works and the Jastrzebie coal mines will take longer. Foreign consultants have helped Poles devise a plan to take old-line companies out of government hands. Western investment banks would set up mutual funds to manage the privatized companies in exchange for shares. Then, the government would give the public, workers, social-security funds, and banks certificates that could be redeemed for shares in the mutual funds. Walesa is also counting on Western investors. With new laws allowing 100% profit repatriation, foreign investment could triple in 1991, to as much as $750 million. A private banking system could also take root as several state banks are privatized and 22 new private banks are licensed. Poland will open a small stock market in July, and it is expected to trade 25 companies by yearend.

Success so far rests on broad support for the Solidarity government and a consensus to break with the communist past. With Western goods now packed into shops, Poles seem prepared to endure the pain now that a better life looks within reach.Gail E. Schares in Warsaw